DG - Sharekhan ValueLine for June 2008

 

Sharekhan ValueLine [For June 2008] Sharekhan www.sharekhan.com

Summary of Contents   THE STOCK IDEAS REPORT CARD   FROM SHAREKHAN'S DESK Turbulent times May is traditionally a weak month for the stock markets. It was no different this year. The Sensex lost over 5% in this May and the continued weakness in the first week of June has shaved off all the gains registered in April, taking the markets back to the sub-16,000 levels. The dangerous combination of deteriorating domestic macro-economic environment and negative global cues was potent enough to trip the markets this time.     MARKET OUTLOOK   Battling against the odds India finds itself in a difficult economic situation with the growth moderating on one hand and the rising inflation on the other. Almost similar challenge is being faced by most of the major developed and emerging economies. While India tries to strike a delicate balance between the two, it should be remembered that the decisions are likely to have political undertones.     Sharekhan top picks Markets corrected sharply last month due to rising inflation and soaring crude oil prices. While Nifty and the Sensex depreciated by 11.5% each as on June 6, 2008, Sharekhan’s recommended portfolio of top picks performed much better and declined only by 4.4%. Ranbaxy Laboratories, Satyam Computer Services and Aban Offshore were the top performers of our portfolio for the month with Satyam Computer that was newly added to our recommendation for May contributing in a big way to the outperformance. On the other hand, Zee News, Larsen & Toubro and Bharti Airtel underperformed the broader markets after a smart run up in April.   STOCK IDEA Opto Circuits India    Cluster: Emerging Star Recommendation: Buy Price target: Rs460 Current market price: Rs338 A growth monitor Key points  Opto Circuits India’s (Opto) non-invasive business is expected to grow at a compounded annual growth rate (CAGR) of 39.5% over FY2007-10E to Rs550.7 crore on the back of rising demand for its sensors and patient monitoring systems, coupled with an increasing market penetration and innovative new launches. The invasive business would be driven by the increasing acceptance of the company's stents due to superior technology and better pricing. Further, the growing revenues from DIOR in Europe and the semi-regulated markets due to limited competition would also fuel the growth of the invasive segment. We expect the invasive segment (EuroCor) to contribute ~43% to the company's total revenues by 2010. Opto has recently completed its $70 million acquisition of Criticre Systems (Criticare), a US-based publicly listed company specialising in vital signs and gas monitoring instruments. We estimate the Criticare acquisition to generate incremental earnings of Rs0.60 per share in FY2009E and Rs1.80 per share in FY2010E. We will incorporate the impact of the acquisition after the announcement of Opto's FY2008 results. We expect Opto's fully diluted earnings (without Critcare) to grow at a CAGR of 35% over FY2007-10E on the back of a 57% CAGR in revenues. We estimate earnings of Rs20.0 per share in FY2009E and Rs29.9 per share in FY2010E. We have valued the stock using the dividend discount model and the P/E mutiple, arriving at price targets of Rs453 and Rs470 per share respectively. Using the average of the two, we fix our price target at Rs460 per share, an upside of 36% from the current levels. Opto is trading at attractive valuations of 16.9x FY2009E fully diluted earnings and 11.3x FY2010E fully diluted earnings. Hence, we initiate coverage on Opto with a Buy recommendation and a price target of Rs460. Our current estimates do not incorporate the Criticare acquisition, which could yield incremental earnings of Rs1.8 per share in FY2010E, implying an upside of Rs28-30 per share to our target price.  STOCK UPDATE 3i Infotech   Cluster: Emerging Star Recommendation: Buy Price target: Rs180 Current market price: Rs132 Results below expectations Result highlights 3i Infotech's consolidated revenues grew by 10.3% quarter on quarter (qoq) and 66.5% year on year (yoy) to Rs349.9 crore in Q4FY2008. While, the organic revenue growth was 7.1% sequentially, acquisitions contributed 3.2% to the sequential growth in the top line during the quarter. The operating profit margin (OPM) was flat at 24.8% in Q4FY2008. The operating profit grew 9.9% qoq to Rs86.7 crore during the quarter. The company's net profit grew by 0.6% to Rs48.8 crore, which was below our expectation of Rs53.7 crore. This was primarily due to lower than expected other income on account of foreign exchange mark-to-market losses in foreign currency convertible bonds (FCCBs). The company reported other income of Rs2.2 crore during the quarter compared to Rs6.1 crore in the previous quarter. For FY2009, the company guided a top line growth of 40% to ~Rs1,700 crore and an earning growth of around 30%, leading to a fully diluted earnings per share (EPS) of Rs13-Rs13.5. The guidance has factored in only the organic growth and the fully diluted capital including FCCBs. The company proposed a dividend of Rs1.5 per share for FY2008. 3i Infotech acquired Regulus for $80 million. Regulus generated sales of $148 million and earnings before interest, depreciation, tax and amortisation (EBITDA) of $20 million in CY2007. The acquisition is funded through syndicated loans with interest rate of Libor plus the premium (base rate of 7%). The company has acquired Regulus at attractive valuation of enterprise value (EV)/EBITDA of 4.0x CY2007. The acquisition appears to be cash accretive since this will directly contribute ~$15 million (EBITDA of $20 million-interest expenses of $5.6 million [7% on $80 million]) to the bottom line next year. To fine tune our earning estimates, we have revised our FY2009 earning estimates by 3.4% and have introduced FY2010 earning estimates in this note. At the current market price, the stock is trading at 9.8x FY2009 and 8.4x FY2010 earning estimates. We maintain our Buy recommendation on the stock with price target of Rs180.   Aditya Birla Nuvo   Cluster: Apple Green Recommendation: Buy Price target: Rs2,035 Current market price: Rs1,507 Insurance business ensures success  Result highlights The consolidated revenues of Aditya Birla Nuvo (ABN) grew by 43.4% year on year (yoy) to Rs3,804.4 crore in Q4FY2008. The growth was driven by the solid performance of the insurance business, which grew by 78.3% yoy to Rs1,477 crore, contributing 39% to the overall revenues. The garment, insulator, financial service, carbon black and telecom businesses also contributed well to the overall growth. The share of the high-growth businesses (garments, life insurance, business process outsourcing [BPO], software and telecom) in the total sales in Q4FY2008 improved to 76% as compared with 73% in the same period last year. However, the operating profit margin (OPM) declined by 560 basis points to 5.2% on account of margin pressure in the key business segments and increased contribution of the insurance division. Consequently, the operating profit declined by 31% to Rs197 crore. The telecom, insulator, rayon, textile and financial service businesses witnessed improvement in the profit before interest and tax (PBIT) margin while the margin declined sharply in the garment, carbon black, BPO, fertiliser and life insurance businesses, thereby reducing the overall margin by 430 basis points to 2.1%. The company registered a net loss of Rs21.8 crore as against a net profit of Rs82.8 crore during the corresponding quarter last year due to higher depreciation and interest costs. The company continued to invest the cash generated from the value businesses into the growth businesses like life insurance and telecom. The company is also planning for aggressive retail expansion and joint venture for value-added fabrics.  At the current market price, the stock trades at a price/earnings ratio of 40.2x FY2009E consolidated earnings and enterprise value(EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 13.0x FY2009E. Based on the sum-of-the-parts valuation of the merged entity, we estimate the fair value of ABN to be Rs2,035 per share. We maintain a Buy recommendation on ABN with a 12-month price target of Rs2,035.   Allahabad Bank  Cluster: Cannonball Recommendation: Buy Price target: Rs138 Current market price: Rs89 Price target revised to Rs138 Result highlights Allahabad Bank reported a profit after tax (PAT) of Rs169.5 crore for Q4FY2008, reflecting a growth of 34.8% year on year (yoy). The PAT was marginally above our estimate of Rs167 crore. The reported net interest income for the quarter stood at Rs442.6 crore, indicating an 8.8% year-on-year (y-o-y) decline. The disappointing net interest income was primarily due to moderate credit growth coupled with a 30-basis point contraction in the reported net interest margin (NIM). Advances growth moderated during the quarter, however it still remains healthy at 20% yoy on the back of robust growth in small and medium enterprise (SME) segment. In line with the advances growth, deposits registered a healthy growth of 20.3% yoy, primarily driven by a 24% y-o-y growth in term deposits. Non-interest income for Q4FY2008 came in at Rs260 crore, up 107.8% yoy mainly driven by a spike in treasury gains (up 528% yoy). The bank utilised higher treasury gains to shore up its provisions. Provisions and contingencies jumped up by 35.2% yoy and reached Rs176 crore as at the end of Q4FY2008. The jump in provisions was primarily due to a 159% y-o-y increase in investment depreciation. Allahabad Bank's asset quality improved significantly during the quarter. The % gross non-performing assets (GNPAs) improved by 61 basis points to 2%, while the % net non-performing assets (NNPAs) improved by 27 basis points to 0.8%. Capital adequacy ratio (CAR) of the bank stood at a comfortable 12.04% compared with 12.52% a year ago. At the current market price of Rs89, the stock trades at 4.3x 2009E earnings per share (EPS), 2.6x 2009E pre-provisioning profit (PPP)/share, 0.8x 2009E book value (BV)/share. We believe at the current valuation, the stock looks attractive considering the high return on equity. We maintain our Buy recommendation on the stock with a revised price target of Rs138.   Andhra Bank  Cluster: Cannonball Recommendation: Buy Price target: Rs117  Current market price: Rs83 Results below expectations  Result highlights Andhra Bank reported a disappointing set of numbers for Q4FY2008. Profit after tax (PAT) during the quarter came in at Rs124.3 crore, indicating a decline of 10.5% year on year (yoy).  Net interest income (NII) was down 11.6% yoy to Rs342.9 crore. The decline in NII stemmed from a 90-basis point contraction in the net interest margin (NIM) owing to higher cost of funds. w Non-interest income continued to be a major contributor to the bottom line with a 32.5% growth and stood at Rs183.3 crore.  Operating expenses were down 7.6% yoy to Rs213.1 crore, primarily driven by a substantially lower staff expenses (down 21.1% yoy). Meanwhile, the other operating expenses were up 8.1% yoy. A strong non-interest income coupled with a decline in the operating expenses helped the bank post a positive albeit muted growth of 5.9% in the operating profit. Reported provisions registered a 12.8% year-on-year (y-o-y) increase and came in at Rs91.4 crore. The effective tax rate for the quarter came in high at 44%. Asset quality of the bank improved further as reflected by a 34-basis point y-o-y decline in %GNPA (gross non-performing assets) to 1.07%. On absolute terms as well, the GNPA declined by 6.2%. Meanwhile, the %NNPA (net non-performing assets) came in at 0.15%, down 2 basis points yoy. Capital adequacy ratio (CAR) at end of the quarter stood at a comfortable 11.61%, largely in line with the year-ago level of 11.33%. Advances registered a growth of 22.4% yoy to Rs34,556 crore, while deposits grew by 19.3% yoy to Rs49,437 crore.  We have fine-tuned our earnings estimates for Andhra Bank. At the current market price of Rs83, Andhra Bank trades at 5.9x 2009E earnings per share (EPS), 3.2x 2009E pre-provisioning profit (PPP)/share and 1.1x 2009E book value (BV)/share. We reiterate our price target of Rs117 and Buy recommendation on the stock.   Apollo Tyres     Cluster: Apple Green Recommendation: Buy Price target: Rs56 Current market price: Rs43 Price target revised to Rs56 Result highlights Apollo Tyres Q4FY2008 performance was better than our expectation, as the decline in operating profit margin (OPM) was less than expected. Sales for the quarter grew by 10% to Rs1,001 crore, led by a volume growth of 3% and a realisation growth of 7%. OPM for the quarter improved by 140 basis points year on year (yoy), however compared to Q3FY2008 it was down by 100 basis points to 12.4% on the back of higher raw material prices. Profit after tax (PAT) for the quarter grew by 38.8% to Rs59.3 crore. Sales in FY2008 grew by 12.2% to Rs3,693.9 crore. OPM for FY2008 increased from 9.4% to 12.6%, mainly on account of lower raw material prices. PAT for FY2008 grew by 93.4% to Rs219.3 crore. On a consolidated basis, net revenues for FY2008 grew by 9.1% to Rs4,691 crore, while profits improved to Rs270 crore (up 130% yoy). Dunlop's PAT margin improved during FY2008 due to restructuring of debt.  Outlook for volume growth during FY2009 would be in a single digit, with replacement sales expected to grow by double digits. Increase in raw material prices is expected to exert pressure on profit margins. We are revising our earning estimate for FY2009 with standalone earnings expected to decline by 14% to Rs4.2. We are also introducing our earning estimate for FY2010 at Rs4.4. Consolidated earnings per share (EPS) for FY2010 is projected at Rs5.6. At the current market price of Rs43, the stock discounts its FY2010E consolidated earnings by 7.6x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.9x. We maintain our Buy recommendation on the stock with a revised price target of Rs56.   Ashok Leyland   Cluster: Ugly Duckling Recommendation: Hold Price target: Rs43 Current market price: Rs39 High capex cost to restrict profit growth  Result highlights The Q4FY2008 results of Ashok Leyland Ltd (ALL) are ahead of our expectations, mainly on the profitability front. The net sales for the quarter grew by 11.8% to Rs2,562 crore. The revenue growth was driven by a 7.1% increase in average realisation. The sales volume grew by 4.5% during the quarter.  Adjusting for a foreign exchange (forex) gain of Rs9.75 crore, the operating profit grew by 10.2% to Rs286.0 crore. The operating profit margin (OPM) declined marginally by 10 basis points to 11.2%. The profitability has improved as compared to Q3FY2008 due to a rise in the sales of high-margin spare parts, engine and defence kits.  The interest cost for the quarter was lower as compared with that in Q3FY2008 due to a reduction in the working capital loans. Adjusted profit after tax (PAT) grew by only 2.9% to Rs173.0 crore in Q4FY2008.  For FY2008 the sales have grown by 7.8% to Rs7,729.1 crore. The adjusted PAT for the year has risen by 4.4% to Rs466.4 crore. The reported PAT has increased by 6.4% to Rs469.3 crore. The commercial vehicle (CV) segment is expected to recover only in FY2009. For FY2009 the company has guided for an industry growth rate of higher single digit and aims to grow at a higher rate during the fiscal. We have estimated a sales volume growth of 8% for the next two years. ALL has huge capital expenditure (capex) plans for the next three years. These include the expansion of the existing capacity and installation of a new manufacturing facility at Uttarakhand. Further investment will also be required for its light commercial vehicle (LCV) joint venture plans with Nissan. All these are expected to exert pressure on its financials and restrict its profit growth.  At the current market price of Rs39, the stock quotes at 9.3x its FY2010E earnings and 6.0x its FY2010E earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Hold call on ALL with a price target of Rs43.   Bajaj Holdings & Investment        Cluster: Apple Green Recommendation: Buy Price target: Rs941 Current market price: Rs674 Price target revised to Rs941 Result highlights Bajaj Holdings & Investment Ltd (BHIL) holds a 30% stake each in the new Bajaj Auto and Bajaj Finserve. BHIL also holds cash and investments held by the erstwhile Bajaj Auto. Since the company was formed after the de-merger of the erstwhile Bajaj Auto, the previous comparable figures are not available.  BHIL has reported a consolidated top line of Rs62.6 crore for Q4FY2008 and that of Rs3,63 crore for FY2008. The profit after tax (PAT) stands at Rs79.3 crore for Q4FY2008 and at Rs525.7 crore for FY2008. BHIL holds cash and investments in various companies, such as ICICI Bank, Bajaj Auto Finance and Maharashtra Scooters. It will continue to hold the cash and investments in liquid form for the next two years to be able to lend to the newly formed Bajaj Auto and Bajaj Fin Serv if and when the need arises. Only when these two companies begin to generate sufficient cash flows on their own to fund their businesses will BHIL invest the cash and investments for the long term. For instance, BHIL also has a 260-acre special economic zone in Aurangabad and part of the cash could be used to expand this business in future. ·         We have valued the stakes of Bajaj Auto and Bajaj Finserve at a 50% holding company discount, which works out to Rs234 per share. Further, as on date the value of BHIL's investment portfolio is Rs692 per share. Taking the value of the company at Rs927. We recommend a Buy on the stock with a price target of Rs941.   Balaji Telefilms         Cluster: Emerging Star Recommendation: Buy Price target: Rs299 Current market price: Rs181 Price target revised to Rs299 Result highlights Balaji Telefilms Ltd (BTL) operating performance for Q4FY2008 was above our expectation. Programming hours in the commissioned category increased to 289.5 hours from 201 hours in Q4FY2007 with the launch of four new shows in the last two quarters. Much lower realisation on these shows combined with discontinuance of one of the more popular and high-revenue yielding shows Kasauti Zindagi kay led to an anticipated drop in the blended realisation in the commissioned category to Rs29.7 lakh per hour. Overall revenues for the quarter increased by 24.7% year on year (yoy) to Rs96.5 crore. The operating profit margin (OPM) for the quarter stood at 36% against 39.3% in Q4FY2007. Thus the adjusted net profit for the quarter increased by 14.7% yoy to Rs24.4 crore.  BTL has pounced on the opportunity provided by the increasing demand for content in Hindi general entertainment channel (GEC) space with the launch of new channels and shows. It has launched four new shows during the last two quarters—Kahe Naa Kahe and Kya Dil Main Hai on 9x and Kuchh Is Tara on Sony and Kis Des Mein Hain Mera Dil on Star Plus. In the coming quarters, the company is looking to diversify its business by launching reality shows such as Kaun Jeetega Bollywood ka Ticket on 9x, Gharwali Baharwali on Sony and a mythological show of Mahabharat. These new launches will ensure growth in the television content business going forward. In the film segment, Balaji Motion Pictures is distributing Ram Gopal Verma's Sarkar Raj to be released on June 6, 2008 and will also release its co-production Woodstock Villa. Thus BTL has ventured film production and distribution in a big way and targets releasing seven to eight movies a year.  We remain positive on the television content and film businesses of BTL. We have revised our sum of the parts price target to Rs299 and maintain our Buy recommendation on the stock. At the current market price of Rs181.3 the stock trades at 9x its FY10E earnings per share (EPS) of Rs20.2.   Bank of Baroda      Cluster: Apple Green Recommendation: Buy Price target: Rs423 Current market price: Rs292 Price target revised to Rs423  Result highlights Bank of Baroda (BoB) reported a bottom line of Rs276.4 crore for Q4FY2008, indicating a 12.5% growth year on year (yoy). The bottom line is below our estimate of Rs303 crore. At Rs1,028.5 crore the net interest income (NII) for the quarter is down 2.4% yoy, pointing towards pressure on the margins. The calculated net interest margin (NIM) of the bank contracted by 62 basis points as the improvement in the yields was more than outweighed by the significant increase in the cost of funds.  The non-interest income grew by a strong 23.6% yoy to Rs554.6 crore. The healthy growth in the non-interest income primarily stemmed from a spike in the treasury gains, which grew by 195.5% yoy.  The operating expenses were contained at Rs768.7 crore (up 1.4% yoy), largely due to a 4.7% decline in the staff expenses. Meanwhile, the other operating expenses grew by 9.8% yoy. Provisions and contingencies witnessed a jump of 36.3% yoy and stood at Rs425 crore during the quarter. This was largely due to provisions of Rs164.8 crore made for the non-performing assets (NPAs) during Q4FY2008 compared with a write-back of Rs46.3 crore in the year-ago period. The asset quality remained healthy with the gross NPA percentage (%GNPA) at 1.84% and the net NPA percentage (%NNPA) at 0.47%. Compared with the year-ago period, the %GNPA and %NNPA indicate an improvement of 63 basis points and 13 basis points respectively. The capital adequacy ratio according to Basel-II norms stood at 12.94% as at the end of Q4FY2008. At current market price of Rs292, BoB is trading at 6.1x 2009E earnings per share, 3.1x 2009E pre-provisioning profit per share and 1x 2009E book value per share. We believe that at current valuation, the stock looks attractive. We maintain our Buy recommendation on the stock with a revised price target of Rs423.   Bank of India   Cluster: Apple Green Recommendation: Buy Price target: Rs458 Current market price: Rs361 Results above expectations Result highlights Q4FY2008 results of Bank of India were above our expectations. The profit after tax (PAT) was Rs757 crore, indicating an impressive growth of 69.2% year on year (yoy).  The net interest income for the quarter came in at Rs1, 216.8 crore, up 25.7% yoy on the back of continued robust growth in advances and expansion in net interest margin (NIM).  The reported NIM for the quarter stood at 3.24%, indicating an expansion of 10 basis points yoy. The improvement in NIM was largely driven by margin expansion in international business, while the margin for the domestic business was flat at 3.71%. The non-interest income was up 13.3% yoy to Rs653.3 crore from Rs576.7 crore a year ago. Importantly, the year-ago non-interest income included a one-time gain of Rs52 crore from Nigerian oil bonds and a Rs14 crore gain from sale of fixed assets. Excluding these one-time gains from the year-ago period, the non-interest income for Q4FY2008 indicated a robust 27.9% year-on-year (y-o-y) growth. The operating expenses during the quarter were up marginally by 1.3% yoy to Rs657.9 crore. The operating expenses growth was contained due to a 7.6% y-o-y decline in staff expenses, which helped to partly offset the 20.9% y-o-y increase in the other operating expenses. Consequently, the cost-income ratio improved significantly to 41.7% from 52.1% a year ago. Provisions and contingencies were down by 6.5% yoy, which in turn boosted the bottom line. The asset quality of the bank improved during the quarter as evidenced by a 8.1% y-o-y decline in the gross non-performing assets (GNPAs) and a 27.1% y-o-y drop in the net non-performing assets (NNPAs). In line, the provisioning coverage ratio improved to 69.3% from 61.3% a year ago. The capital adequacy ratio (CAR) moved up to 12.95% from 11.58% a year ago, helped by qualified institutional placements (QIPs). Advances witnessed a strong growth of 32.3% yoy and stood at Rs114,793 crore at the end of Q4FY2008. Meanwhile, the deposits grew by 25.1% yoy to Rs150,012 crore. At the current market price of Rs360.7, Bank of India trades at 7.4x 2009E earnings per share (EPS), 4.1x 2009E pre-provisioning profit (PPP) per share and 1.8x 2009E book value (BV) per share. We maintain our price target of Rs458 and Buy recommendation on the stock.   BASF India Cluster: Ugly Duckling Recommendation: Buy Price target: Rs330 Current market price: Rs212 Expanding offerings to automotive business BASF India (BASF) plans to build a new engineering plastics compounding plant with a capacity of 9,000 tonne per annum at its existing Thane facilities. The new plant is expected to be operational by the second half of CY2009 and would primarily cater to the automotive, electrical and electronics industries. The company has also planned to triple its automotive catalyst capacity at its Chennai-based facility by 2009. In addition, BASF Coatings commissioned a new Refinish Color Lab to mend damaged coatings at Mangalore in February 2008 and is expanding its e-coat facility, which is expected to be completed by the end of 2008.   Bharat Bijlee   Cluster: Apple Green Recommendation: Buy Price target: Rs2,907 Current market price: Rs2,221 Price target revised to Rs2,907 Result highlights Bharat Bijlee Ltd's (BBL) Q4FY2008 results were below our expectation on account of lower-than-expected revenue growth. The company reported a growth of 11.4% in net sales to Rs199.3 crore.  Operating profit grew by 9.9% to Rs48.9 crore. Operating profit margin (OPM) declined marginally (30 basis points). The OPM remained healthy and improved sequentially on account of improved absorption of fixed cost booked in Q3FY2008 on material lying in inventory which was cleared in the quarter under review. Staff cost and other expenditure as percentage of sales declined by 130 and 210 basis points respectively on a year-on-year basis. Other income declined by 44.6% to Rs1.3 crore. Interest cost declined by 58.8% to Rs0.6 crore, while depreciation charge was marginally up (7.4% year on year [yoy]) to Rs1.3 crore. Consequently, net profit reported an increase of 7.3% to Rs31.2 crore, which was below our expectation on account of a slower revenue growth. Subsequent to lower-than-expected performance of the company, we have reduced our FY2009 and FY2010 estimates to Rs161 and Rs190.5 respectively. We expect BBL to report a compounded annual growth rate (CAGR) of 20.2% and 21.9% in its revenues and profits respectively over FY2008-10E.  With increased spending in transmission & distribution (T&D) infrastructure in the country, the transformer-manufacturing industry is witnessing a surge in demand. BBL is bringing on stream an additional 3,000MVA of transformer manufacturing capacity, which in our view would help it tap the rising demand.  We reiterate our Buy recommendation on the stock with a revised price target of Rs2,907 valuing the core business at 14x FY2010E earnings per share (EPS) and Rs239 per share for market investments (30% discount to the current market value). At the current market price, the stock discounts its FY2009E and FY2010E earnings by 13.8x and 11.7x respectively.    Bharat Electronics  Cluster: Apple Green Recommendation: Buy Price target: Rs1,610 Current market price: Rs1,228 Strong Q4FY2008 performance Result highlights Bharat Electronics Ltd (BEL) has announced its actual results for FY2008. For FY2008, sales grew by 4.5% to Rs4,069.3 crore. As mentioned in our earlier provisional update Q4 was very strong for the company and accounted for 56% of the sales. Operating profit margin (OPM) for Q4FY2008 was also strong at 30.5%.  During Q4FY2008, the company reversed the provision made towards pension and other liabilities for FY2007 as per AS-15, which stood at Rs21.32 crore. Adjusted for the same, the net profit stood at Rs483 crore. Profit after tax (PAT) for FY2008 was at Rs767 crore (up 7.4% year on year [yoy]). Order book for FY2009 stood at Rs9,450 crore. The management has guided its plans to achieve revenues of Rs100 billion by FY2012, implying a compounded annual growth rate (CAGR) of 25%. At the current market price of Rs1,228, the stock trades at 11.2x FY2009E and 9.7x FY2010E earnings estimates. On an adjusted earnings (adjusted for cash) basis, the company trades at 5x FY2009E and 4.6x FY2010E, which offers strong downside support to the stock. We maintain our Buy recommendation on the stock with a price target of Rs1,610.   Bharat Heavy Electricals         Cluster: Apple Green Recommendation: Buy Price target: Rs2,381 Current market price: Rs1,660 OPM hit by wage hike provision Result highlights Bharat Heavy Electricals Ltd (BHEL) has declared its audited results for Q4FY2008 and the same are broadly in line with the provisional numbers announced by it earlier. The net sales for Q4FY2008 grew by 4.1% to Rs7,202.0 crore. The growth in the revenues was slow due to delay in the execution of projects on account of capacity constraints and short supply of critical equipment like forgings and casting. On a segmental basis, the revenues of the power segment grew by 4.6% to Rs5,674 crore while that of the industry segment saw a growth of 5.3% year on year (yoy) to Rs2,413.3 crore. The operating profits of the company declined by 14.1% to Rs1,363.3 crore, resulting in a contraction of 400 basis points in the operating profit margin (OPM). The primary reason for the decline in the OPM is the provisioning done by the company for increasing the wages in line with the recommendations of the Sixth Pay Commission. During the quarter BHEL made provision of Rs492 crore for wage hikes. The company made provision for a 45% increase in the wages vs the provision of a 25% increase in the wages made in the previous quarters of the fiscal. The provision also included Rs290 crore towards incremental leave encashment. The current order book of the company stands at Rs91,400 crore (as against Rs85,400 crore at the end of FY2008). The company has booked order to the tune of Rs6,000 crore till date in Q1FY2009. The current order book of the company is 4.25x its FY2008 revenues. BHEL completed the acquisition of Bharat Heavy Plates and Vessels (BHPV) during the quarter. From June 2008, BHPV is expected to produce pressure parts to the tune of 500 tonne per month which would aid BHEL to expedite its execution process and increase its execution capacity by 5%. We have lowered our earnings estimate for FY2009 by 3.4% Rs74.9 and that for FY2010 by 2% to Rs101.4. At the current market price the stock is discounting its FY2009 and FY2010 earnings estimates by 22.2x and 16.4x respectively. We believe the current valuations of the stock are attractive, considering the strong visibility of the company's earnings. We maintain our Buy recommendation on the stock with price target of Rs2,381.   Bharti Airtel    Cluster: Apple Green Recommendation: Buy Price target: Rs1,100 Current market price: Rs847 Bharti in talks with MTN Group  Key points Bharti Airtel (Bharti) has informed that it has entered into exploratory discussions with the MTN Group, South Africa to acquire a majority stake in the latter. MTN Group is a South African telecom giant operating in 21 African countries as well as the Middle East. As at the end of March 2008, MTN Group recorded more than 68 million subscribers across its operations. For CY2008 it expects a 36% growth in its subscribers. It has an aggregate market share of 36% across regions where it is present. According to media reports, Bharti’s proposed bid to acquire a 51% stake in MTN Group is at an indicated bid price of US$21.8 per share. The enterprise value (EV) at this price works out to US$43 billion.  At the indicated bid price of Bharti the acquisition appears reasonable at EV/subscriber of $630 and EV/earnings before interest, depreciation, tax and amortisation (EBIDTA) (CY2007) of 10.1x. However, any substantial increase in the acquisition cost due to competitive bidding could make the deal unattractive for Bharti. We would keenly watch the company for further developments and announcements. At the current price of Rs847 the stock is trading at 15.5x its FY2010E. We maintain our Buy call on the stock.   Canara Bank      Cluster: Apple Green Recommendation: Buy Price target: Rs315 Current market price: Rs237 Q4FY2008 PAT higher than expected  Result highlights Canara Bank has reported a profit after tax (PAT) of Rs464.1 crore for Q4FY2008, reflecting a decline of 8.1% year on year (yoy). The reported PAT is marginally above our expectation of Rs451.1 crore. The top line performance is disappointing with the net interest income (NII) declining by 12.9% yoy to Rs922.5 crore owing to pressure on the margins and a muted advances growth. The non-interest income provided some relief with a 14.1% growth yoy.  The operating expenses grew by 10.1% to Rs697.6 crore during the quarter. The growth in the operating expenses can be traced to a 30.9% jump in the other operating expenses. Meanwhile, the staff expenses declined by 4.3% yoy. Despite the other income growth coupled with lower operating expenses, the pre-provisioning profit was down 10.7% yoy. Notably, the provisions continued their declining trend. The provisions and contingencies stood at Rs375.1 crore, down 24.5% yoy. The lower provisions coupled with a positive growth in the non-interest income helped the bank check the decline in the profitability. The asset quality of the bank remained healthy with an improvement on absolute and relative basis. The gross non-performing asset (GNPA) percentage came in at 1.31%, down 20 basis points yoy, while the net non-performing asset (NNPA) percentage was down 10 basis points to 0.84%. The capital adequacy ratio was healthy at 13.25% as at end of March 2008, largely in line with the year-ago level of 13.50%. Growth in advances was muted at 8.9% as the bank focussed on rebalancing its advances book. In line, the deposit growth was muted at 8.2% yoy. At the current market price of Rs237, Canara Bank trades at 5.4x 2009E earnings per share, 2.9x 2009E pre-provisioning profit and 1.0x 2009E book value. The stock is trading at par with its 2009E book value making it an attractive buy. We maintain our Buy recommendation and price target of Rs315 on the stock.   Ceat       Cluster: Ugly Duckling Recommendation: Buy Price target: Rs196 Current market price: Rs119 Price target revised to Rs196  Result highlights Ceat's Q4FY2008 results are ahead of our expectations, mainly on the sales front. The net sales of the company grew by 14.8% to Rs646.2 crore in the quarter. The original equipment (OE) sales continued to decline whereas the replacement sales grew strongly by 28.2% in Q4FY2008. The operating profit margin (OPM) declined by 180 basis points to 6.0% as a result of a higher raw material cost. Consequently, the operating profit declined by 12.3% to Rs38.5 crore. For FY2008, the sales grew by 9.2% to Rs2,329 crore and the adjusted profit after tax (PAT) increased by 80.7% to Rs67.7 crore. Ceat sold a small part of its Bhandup plant and realised a value of Rs130 crore during the year. So, the reported PAT grew by 294% to Rs147.6 crore. The company increased prices of tyres by 5% in April 2008 due to the rising raw material prices. It has announced a capital expenditure (capex) of Rs1,000 crore for setting up a radial plant and relocating the Bhandup plant. Further details of this capex including the time period and the funding pattern are yet to be finalised.  We maintain our positive view on Ceat, as the stock is trading at very cheap valuations. The volume growth could be higher than our expectations in view of the improvement in the OE volumes, the company's ability to pass on any further rise in input prices to its customers and the cooling off of the key raw material prices. At the current market price of Rs119 the stock is trading at 5.2x its FY2010 earnings of Rs24.5 and enterprise value (EV/earnings before interest, tax, depreciation and amortisation (EBITDA) of 2.8x. We maintain our Buy recommendation on Ceat with a revised price target of Rs196.   Crompton Greaves Cluster: Apple Green Recommendation: Buy Price target: Rs367 Current market price: Rs230 Strong operating performance Result highlights In Q4FY2008, Crompton Greaves Ltd (CGL) reported a revenue growth of 17.1% in its standalone revenues on the back of a robust 27.3% growth in the revenues of the consumer products business. The operating profit of the company grew by 36.9% to Rs156.6 crore, while the operating profit margin (OPM) improved by 200 basis points year on year (yoy) to 13.5%. The net profit grew by 47.4% to Rs103.1 crore. On a consolidated basis, for FY2008 the CGL group reported an increase of 21.2% in the revenues, while the operating profit increased by 54.1% to Rs743.9 crore. Led by strong operating performance by Pauwels, the OPM on a consolidated basis improved by 230 basis points for the full year. The profit after tax (PAT) grew by 44.4% to Rs406.7 crore. The current order book the company stood at Rs5,120 crore of which Rs2,128 crore worth of orders are for the standalone entity, while the balance orders forms part of international subsidiaries. The management expects a strong order inflow for FY2009.  The management has guided for a 20% growth in FY2009 in both its domestic and international subsidiaries. We expect CGL’s revenue to grow a compounded annual growth rate (CAGR) of 20.4%, while the profits are expected to grow at a CAGR of 26.7% over FY2008-10E.  Against the backdrop of a steep increase in commodity prices, the margins of the standalone entity are expected to remain under pressure during FY2009. We have factored the same in our estimates and have revised out FY2009 estimates downwards by 4.1% to Rs13.8 and FY2010 by 2.1% to Rs18 per share. The power transmission & distribution (T&D) space is expected to witness a strong order inflow and revenue growth over the next five years given the emphasis on power generation and T&D in the Eleventh Five Year Plan (2007-12). In our opinion, CGL, a key integrated player in the space with proven track record is all set to witness a robust growth, going forward.  At the current market price the stock is trading at 16.6x and 12.8x FY2009E and FY2010E earnings. We believe the current valuations of the stock are extremely attractive and recommend a Buy on the stock with a price target of Rs367.   Deepak Fertilisers & Petrochemicals Corporation Cluster: Ugly Duckling Recommendation: Buy Price target: Rs169 Current market price: Rs106 Q4FY2008 results: First-cut analysis Result highlights The net sales of Deepak Fertilisers & Petrochemicals Corporation (DFPCL) increased by 56.8% year on year (yoy) to Rs330 crore. The chemical division and the fertiliser division contributed 72% and 27% respectively to the net sales. The revenue from the chemical division increased by 48.2% yoy to Rs241.5 crore on the back of a strong contribution from isopropyl alcohol (IPA) sales, while the sales from the fertiliser division increased by 72.3% yoy to Rs90.6 crore due to an increase in the trading volume. The operating profit during the quarter grew by 38.7% yoy to Rs56.8 crore, while the operating profit margin (OPM) declined by 230 basis points to 17.2%. The segmental profit before interest and tax (PBIT) for the chemical division increased by 41.8% to Rs62.4 crore with the margin declining from 27% to 25.8%. The loss in the fertiliser division reduced to Rs0.3 crore from Rs1.4 crore.  The interest expenses were higher by 11.6% yoy on account of an increased outstanding debt issued for new projects and capacity expansion. The depreciation charge also increased by 5.7% yoy during the quarter. The adjusted profit after tax (PAT) increased by 13.1% yoy to Rs31.3 crore with the margin reducing by 370 basis points to 9.5%. The effective tax rate increased during the quarter as the company had carry forward losses last year. At the current market price of Rs106, the stock is trading at 6.8x its FY2009E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.3x. We maintain our Buy recommendation on the stock with a revised price target of Rs169.   Elder Pharmaceuticals Cluster: Apple Green Recommendation: Buy Price target: Rs508 Current market price: Rs371 Another strong performance Result highlights Elder Pharmaceuticals (Elder) has reported a strong revenue growth of 32.3% for Q4FY2008 and of 22.0% to Rs548.1 crore for FY2008. The revenue growth was driven by the continued momentum in the company's star brands: Eldervit, Shelcal, Amrifru and Fairone; the strong contribution from exports through its joint venture in Ghana; and the mega success of its three products, Shelcal CP, Phyto Omega and Hibor, which were launched towards the end of Q3FY2008. Elder has reported an expansion of 20 basis points in its operating profit margin (OPM) to 20.2% for the quarter and of 280 basis points to 20.2% for FY2008. Consequently, the operating profit of the company rose by 33.0% to Rs31.5 crore in Q4FY2008 and by 41.6% to Rs110.5 crore in FY2008. Elder’s net profit rose by 36.5% to Rs20.4 crore in Q4FY2008 and by 36.1% to Rs71.8 crore in FY2008. The net profit growth was robust despite substantial increases in the interest cost (on account of the new external commercial borrowing made by the company and an increase in the interest rates) and depreciation charge during the quarter (due to the commissioning of new capacities). The management has provided a rosy outlook for the next two to three years and expects to maintain its revenue momentum at around 20%. We have accordingly revised our FY2009 revenue estimate upwards by 1.4% to Rs657.8 crore and the profit estimate by 12.0% to Rs90.3 crore. We are also introducing our FY2010 numbers in this report. We expect the company to register a revenue growth of 18.0% in FY2010E to Rs769.7 crore. The profits are expected to grow by 25.1% to Rs110.9 crore, resulting in earnings of Rs59.0 per share in FY2010. Our estimates do not factor in the Biomeda acquisition or any other future acquisitions the company may undertake in order to achieve its revenue target of Rs1,000 crore by FY2010E. At the current market price of Rs371 the stock is trading at 7.9x FY2008E earnings and at 6.3x FY2009E earnings. We maintain our Buy recommendation on Elder with a price target of Rs508.   Gateway Distriparks    Cluster: Cannonball Recommendation: Buy Price target: Rs236 Current market price: Rs200 Price target revised to Rs236 Result highlights Gateway Distriparks Ltd's (GDL) Q4FY2008 results were below our expectation due to higher interest and depreciation charges as well as other start-up costs associated with the rail business. On a consolidated basis, the net sales grew by 78% year on year (yoy) to Rs83.5 crore due to a higher throughput at Jawaharlal Nehru Port Trust (JNPT). The operating profit margin (OPM) continued to face pressure due to losses from rail business and cold storage business, which declined by 1,420 basis points yoy to 32.8%. Both depreciation and interest charges rose considerably due to investment in container, rail and trucking businesses. Consequently, the net profit declined by 23% to Rs15.2 crore. GDL plans to add another six trains by June 2008 for its container rail business and has earmarked a capital expenditure (capex) of about Rs200 crore for the same for FY2009. However, it is currently operating only at domestic routes, as the joint venture with Concor to operate trains at more profitable export import (EXIM) routes has got delayed due to procedural hurdles.  We are lowering our FY2009 estimates due to lower margins, delay in entering EXIM routes and lower utilisation of container rail business. We estimate earnings of Rs8.1 for FY2009 and Rs9.5 for FY2010. At the current levels, the stock is trading at 12.6x FY2010E earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs236.   Genus Power Infrastructures   Cluster: Ugly Duckling Recommendation: Buy Price target: Rs673 Current market price: Rs563 Price target revised to Rs673 Result highlights Genus Power Infrastructures Ltd (GPIL) reported a 27.4% growth in the revenues. The sales were below our expectation. The meters sales continue to be robust, however the project sales were deferred due to rising input costs. The operating profit grew by 75.9% year on year (yoy) to Rs35.1 crore, which was way above our expectation. The operating profit margin (OPM) reported a sharp 500-basis-point improvement to 18.1% on the back of a steep decline in the other expenses. The other expenses as percentage of sales decreased to 2.5% from 11.7% in Q4FY2007. The interest cost was up 12.4% to Rs4.4 crore, while the depreciation charge rose by 107.5% to Rs1.4 crore. Aided by better-than-expected operating performance the net profit of the company reported a growth of 102.1% to Rs25.5 crore. This was in line with our expectation, but higher than street expectation. The current order book of the company stood at Rs417 crore with close to 60% coming from the meters business. The company was also the lowest bidder for orders worth Rs450 crore. The full year sales were lower than our expectation. Hence we have revised our earnings and our fully diluted earnings per share (FDEPS) for FY2009 now stands at Rs48.7. We are also introducing our FY2010 estimates and expect GIPL to deliver compounded annual growth rate (CAGR) of robust 32.7% and 41.6% in its revenues and profits respectively over FY2008-10E. Our FY2010 FDEPS stands at Rs63.5. GPIL is a leading manufacturer of electronic energy meters. In our view the company is well poised to benefit from the government's plan to spend on the country's power transmission and distribution sector. We maintain our positive outlook and our Buy recommendation on the stock with an upward revision in price target to Rs673. At the current market price, the stock trades at 11.6x its FY2009E and 8.9x its FY2010E earnings.   Grasim Industries   Cluster: Apple Green Recommendation: Buy Price target: Rs3,002 Current market price: Rs2,369 Price target revised to Rs3,002 Result highlights Grasim Industries (Grasim) Q4FY2008 results were below our estimates. The company reported a top line growth of 10.8% year on year (yoy) to Rs2,742.4 crore. This was on account of higher revenues from all its divisions especially the cement division. The cement division reported a 14.7% increase in the revenues on account of a 8.9% year-on-year (y-o-y) increase in volumes to 4.27 million metric tonne (MMT) and a 9.7% y-o-y increase in grey cement realisation to Rs3,267 per tonne. The viscose staple fibre (VSF) division reported a 9.6% growth in revenues to Rs714.9 crore on account of 21.1% higher realisation at Rs107.4 per kilo. Higher realisations compensated for 10.1% lower volumes, which stood at 61,650 tonne for the quarter. Revenues from the sponge iron and chemical divisions recorded growth of 14.1% and 7.3% respectively. The operating profit margin (OPM) for the quarter declined by 390 basis points to 24.2% on account of an increase in the cost pressure across all the divisions. The earning before interest, depreciation, tax and amortisation (EBIDTA) margin of the cement division declined by 330 basis points yoy to 28.8%. The EBIDTA margin of the VSF division dropped by 400 basis points yoy to 26.7% mainly on account of higher pulp and sulphur prices. Sponge iron division managed to improve its EBIDTA margin by 140 basis points to 16.7%, on account of a 32% y-o-y increase in realisations. The chemical business was the worst performer with EBIDTA margin falling by 1,140 basis points yoy to 24.9%. This was mainly because of the increase in raw material and coal prices along with higher maintenance cost. Consequently the operating profit of the company declined by 4.6% yoy to Rs662.3 crore. The adjusted net profit of the company increased by a meagre 1.5% to Rs455.6 crore. The growth in the net profit was mainly due to an increase of 53.1% in the other income to Rs118.7 crore and a 25.9% decline in the interest expense to Rs27.2 crore. During the quarter ended, the company had a profit on sale of subsidiary of Rs180.3 crore (net of tax) and a write back of provision for diminution in value of investment/loans of Rs31.52 crore (net of tax). Thus, the reported net profit of the company increased by 40.6% to Rs667.4 crore. For the quarter ended March 2008, on a consolidated basis the net sales increased by 15.3% to Rs4,714.7 crore, and the reported PAT stood at Rs880.8 crore, up 51.2%. For the year ended FY2008, on a standalone basis the net sales increased by 18.9% to Rs10,278.1 crore and the adjusted PAT stood at Rs2,016.1 crore, up 33.5%. On a consolidated basis, the net sales increased by 20.5% to Rs17,036.9 crore and reported net profit stood at Rs2,891.4 crore up 47% yoy. At the current market price of Rs2,369, the stock is trading at 9.5x its estimated FY2009 earnings per share (EPS). Based on our sum-of-the-parts valuation, we maintain our Buy recommendation on the stock with a revised price target of Rs3,002.   ICI India        Cluster: Ugly Duckling Recommendation: Buy Price target: Rs622 Current market price: Rs542 Back on the buying list Result highlights For Q4FY2008 ICI India has reported a sales growth of 9% year on year (yoy) to Rs220.0 crore; the same is as per our expectations. The paints business of the company grew by 7.9% yoy to Rs183.9 crore whereas the adhesives business (which is a "discontinuing" business) achieved a growth of 20.6% to Rs31.6 crore.  The operating profit margin (OPM) declined by 30 basis points yoy to 8.7% during Q4FY2008. The margin declined mainly because of higher raw material and employee costs, which grew by 9.2% and 22.1% respectively. The operating profit increased by 6.1% to Rs19.2 crore. The other income stood at Rs1.5 crore, which is lower compared with the previous year's other income of Rs36.2 crore. The other income was lower in Q4FY2008 because in Q4FY2007 the other income had included a dividend income of Rs31.1 crore from Quest International India prior to the latter's divestment. The lower other income and higher incidence of tax led to a decline of 24.0% in the adjusted net profit to Rs9.6 crore in Q4FY2008 as compared with Rs12.7 crore during the corresponding quarter of the previous year. As part of its global strategy, ICI India's adhesive business is being sold to an Indian affiliate of the Henkel group for a total consideration of Rs260 crore, subject to adjustments for actual working capital and cash balances. The company has obtained the approval of its shareholders for the sale. The completion of the transaction requires certain regulatory approvals and will be accounted for after the receipt of the same. For FY2008 the consolidated net sales dropped by 6.3% yoy to Rs951.2 crore. The raw material cost as a percentage of sales declined by 270 basis points yoy to 58.6% during the year, leading to a 70-basis-point improvement in the OPM to 11.6%. We remain positive on ICI India primarily on account of its focus on the paints business, the good prospects for the paint industry and the huge pile of cash at the company's disposal that opens up opportunities for organic and inorganic growth. At the current market price of Rs542 the stock is trading at 15.7x (net of cash on books) its FY2010E core earnings per share (EPS) of Rs17.6. We upgrade our recommendation on the stock from Hold to Buy with a price target of Rs622.   Indo Tech Transformers  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs591 Current market price: Rs489 Price target revised to Rs591 Result highlights For Q4FY2008, Indo Tech Transformers Ltd (ITTL) results were below our expectation on both the revenue and the profitability fronts.  The revenues reported a decline of 17.1% to Rs47 crore led by drop both in the realisations and volumes. The volumes declined by 6.8% year on year (yoy) to 688 Mega Volt Ampere (MVA), while the realisations were down by 11% to Rs6.83 lakh. The major reason cited for the decline in the volumes was the shift of man power from the existing capacity to the new plant, which led to delay in executions. The operating performance of the company however continued to be robust with a 390-basis point rise in the operating profit margin (OPM) to 31%. Consequently, the operating profit declined by 5.1% to Rs14.6 crore.  Led by better than expected operating performance, the company reported a decline of 6% to Rs9.7 crore in the net profits. The current order book of the company stood at Rs153.3 crore, which is equivalent to 1,964MVA and is executable over the next five-six month period. The company has brought on stream an additional capacity of 4,000MVA during FY2008, however the first shipment was made only in May 2008.  The revenue growth in FY2008 has been slower than our expectation mainly on account of the delay in the commercial production by the new capacity. The new plant would take couple of months to stabilise and then the capacity would be ramped up. We have therefore reduced our revenue estimates for FY2009 and our earnings per share (EPS) to Rs46. We are also introducing our FY2010 estimates and expect ITTL to deliver earnings growth at a compounded annual growth rate (CAGR) of 19.8% and our FY2010E EPS stands at Rs52.7 per share. We maintain our Buy recommendation on the stock with a revised price target of Rs591. At the current market price the stock trades at 9.3x FY2010E EPS and 5.3x enterprise value (EV)/Earnings before interest, depreciation, tax, and amortisation (EBIDTA).   ITC        Cluster: Apple Green Recommendation: Buy Price target: Rs247 Current market price: Rs206 All is well Result highlights ITC registered a growth of 16.7% year on year (yoy) in its net sales to Rs3,934.4 crore during Q4FY2008. The sales growth was led by strong growth in non-cigarette FMCG and agri-business revenues and was slightly higher than our expectation of Rs3,865 crore. The operating profit margin (OPM) for the quarter declined by 104 basis points to 26.6% as against 27.6% in the corresponding quarter of the previous year. This was mainly because of the rise in the raw material cost, as the raw material cost as percentage of sales increased by 274 basis points to 46.9% as compared to 44.1% in the same quarter last year. Thus, the operating profit increased by 12.3% yoy to Rs1,044.7 crore during the quarter. A jump of 60.0% in other income to Rs163.7 crore (higher than our expectation), helped the net profit to grow by 13.1% to Rs735.6 crore during Q4FY2008.  Despite a 6% increase in excise duty and imposition of a 12.5% VAT, cigarette volumes declined only by 1% as against our expectation of 2.5% for FY2008. The non-cigarette FMCG business continued its remarkable progress with a 48.1% revenue growth. The segment loss increased to Rs117.9 crore on account of the increase in the brand building activities on new product launches in the personal care category. Increase in commodity prices such as wheat, vegetable oil, maize and skimmed milk powder are imposing pressure on the margins of branded packaged food business. Agri business regained its growth momentum in the second half of FY2008. Consequently, agri-business revenues increased by 16.1% to Rs1,078.1 crore and the profit before interest and tax (PBIT) margin improved to 3.4% for Q4FY2008. We continue our bullish stance on the stock and maintain our Buy recommendation with a price target of Rs247. At the current market price of Rs205.7 the stock trades at 17.9x its FY2010E earnings per share (EPS) of Rs11.5.    Jaiprakash Associates Cluster: Ugly Duckling Recommendation: Buy Price target: Rs390 Current market price: Rs269 Results above expectations Result highlights Jaiprakash Associates Ltd (JAL) Q4FY2008 results were above our estimates. On a standalone basis the company reported a top line growth of 44.5% year on year (yoy) to Rs1,280 crore. This was on account of a 45.7% year-on-year (y-o-y) growth in the revenues from the construction division to Rs475 crore. The higher revenue was also aided by the revenue from the real estate division, which stood at Rs256 crore against nil during the corresponding period last year.  The operating profit margin (OPM) on a standalone basis for the quarter improved by 140 basis points yoy to 31.1%. This was mainly on account of higher earning before interest and tax (EBIT) margin of the construction division, which reported an increase of 950 basis points to 25.5%. The real estate division reported an EBIT margin of 31.6%, while the cement division reported a negligible improvement of 30 basis points in EBIT margin to 35.3%. However the hotel and hospitality division reported a decline of 1,190 basis points in the EBIT margin to 16.7%. Consequently the operating profit jumped by 51.3% to Rs398 crore. On a standalone basis, the company reported a net profit after tax (PAT) of Rs211 crore, up by 61.1% yoy. The growth in the net profit was mainly because of an increase in the other income by 120% to Rs66 crore. For the year ended March 2008, on a standalone basis the net sales increased 14.6% yoy to Rs3,985 crore and the PAT stood at Rs610 crore, up 47% yoy. On a consolidated basis, the net sales increased by 6.8% to Rs4,201 crore and the adjusted PAT stood at Rs627 core, an increase of 21.2% yoy. We have upgraded our FY2009 earnings per share (EPS) estimate by 10.9% to Rs6 and have also introduced FY2010 estimates. The estimated PAT for FY2010 stands at Rs947.9 crore, implying a growth of 26.4% over FY2009E. At the current market price of Rs269, the stock is trading at 45x its FY2009E EPS and 35x its FY2010E EPS. We maintain a Buy on the stock with a price target of Rs390 based on our sum-of-the-parts valuation.   JK Cement        Cluster: Cannonball Recommendation: Buy Price target: Rs250 Current market price: Rs148 Price target revised to Rs250 Result highlights For Q4FY2008 JK Cement has reported a 5.2% year-on-year (y-o-y) increase in its net sales to Rs385.6 crore. The sales growth was achieved on the back of an 8.6% rise in the y-o-y blended realisation per tonne to Rs3,888. On the other hand, the volumes declined 3.1% yoy to 9.92 lakh tonne (9.3 lakh tonne grey cement and 0.64 lakh tonne white cement) due to a shutdown at one of its kilns during the quarter. There was a sharp increase of 14.6% in the total cost per tonne of cement to Rs2,853. This was mainly on account of a 59.3% y-o-y increase in the employee cost to Rs20 crore along with a 10.1% y-o-y increase in the per tonne cost of power and fuel to Rs920. The freight cost also increased by 9.7% to Rs786 per tonne. Consequently the earnings before interest, depreciation, tax and amortisation (EBIDTA) per tonne declined by 5.2% yoy to Rs1,035 during the quarter.  The operating profit margin (OPM) of the company witnessed a sharp decline of 390 basis points to 26.6%. The margin came under pressure on account of the rising input cost and the company's inability to pass on the increase to the consumer. Consequently, the operating profit declined by 8.1% year on year (yoy) to Rs102.6 crore.  The reported profit after tax (PAT) also declined by 2.6% yoy to Rs59.8 crore. This was much lower than our estimate of Rs72 crore due to a lower volume growth and effective higher tax rate.  For the year ended FY2008, JK Cement has reported an 18.2% y-o-y growth in its net sales to Rs1,485.3 crore and a 48.5% growth in its reported PAT to Rs265.2 crore. The company has declared a dividend of Rs5 per share for the quarter. To factor in the cost savings arising due to the full operation of all its captive power plants, including the 13-megawatt (MW) waste heat recovery plant, we have increased our FY2009 earnings per share (EPS) estimate by 10% to Rs30.9. We have also introduced our FY2010 estimates in this note.  At the current market price of Rs148, the stock is trading 4.8x its FY2009E EPS, 3.4x its FY2010E EPS and an enterprise value (EV) per tonne of US$48 based on the expanded capacities. We maintain a Buy on the stock with a revised price target of Rs250.   KSB Pumps    Cluster: Emerging Star Recommendation: Buy Price target: Rs451  Current market price: Rs281 Expanding capacity Result highlights KSB Pumps' Q1CY2008 results were slightly below our expectation because of lower than expected margins and slightly lower other income. The net sales for the quarter rose by 20.5% to Rs132.1 crore.  The operating profit margin (OPM) remained stable on a year-on-year (y-o-y) basis at 16.1%, but the same declined by 300 basis points on a sequential comparison. On segmental basis, the profit before interest and tax (PBIT) margin of the pump division rose by 100 basis points to 12.4%, while that of the valve division declined by 140 basis points to 24.2%.  Low other income and stable interest and depreciation charges led to a 3% growth in the net profits to Rs12.9 crore. The company plans to spend close to Rs200 crore in the next four years towards capacity expansion and new product development. The capacity expansion is in line with the potential growth it sees in the pump and valves industry.  Going forward, we expect the margins will be maintained in this region more or less. However, there would continue to be a certain level of lumpiness in the margins depending on the nature of orders executed during the quarter. However, we downgrade our CY2008 earning estimate by 8% to Rs29.9 due to lower margin expectations going forward, and introduce our CY2009E earning estimate of Rs34.1.  Considering the buoyancy in its user segments, particularly refinery and power sectors, we believe that the company would be able to take advantage of the same on account of its capacity expansion plans. Hence we maintain our positive outlook on the company. At the current market price, the stock is trading at 9.6x its CY2009E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.6x. We maintain our Buy recommendation on the stock with a price target of Rs451.   Larsen & Toubro Cluster: Evergreen Recommendation: Buy Price target: Rs4,044 Current market price: Rs2,882 Performance beats expectations Result highlights The Q4FY2008 results of Larsen and Toubro (L&T) are ahead of our expectations on both top line and profitability fronts. The stand-alone top line saw a strong growth of 35.5% to Rs8,466.9 crore, ahead of our expectations. The growth was primarily driven by the stellar performance of the engineering and construction (E&C) division, which grew by 38.2%. The operating profit margin (OPM) improved by 20 basis points year on year (yoy) and by 250 basis points sequentially to 13.2%. Looking at the segmentals, the E&C division reported an excellent margin growth as the earnings before interest and tax (EBIT) margin improved by 130 basis points yoy to 15%. Consequently, the overall operating profit grew by 38.1% to Rs1,118.1 crore. A higher other income and a stable depreciation charge led to a 25.5% growth in the adjusted profit. The reported profit rose by 38% to Rs966.8 crore after taking into account an exceptional item of Rs87.23 crore relating to the gain on the sale of a stake in a group company. L&T has also decided to issue bonus shares in the ratio of 1:1 subject to the approval of the shareholders. The management maintains its bullish outlook and stands by its earlier guidance of maintaining a 30-35% top line growth in the next couple of years. The demand scenario remains bullish and the company is hopeful of maintaining its margins going forward as well. We have realigned our consolidated earnings per share (EPS) for FY2009 and FY2010 to factor in the performance of the key subsidiaries and the company's (L&T) stake sale in the RMC business and in HPL Cogen. Our revised EPS for FY2009E and FY2010E stands at Rs110.5 and Rs150.1 per share respectively.  L&T's sound execution track record and strong order book position as well as the excellent performance of its subsidiaries enforce our faith in the company. We value the core business of L&T at 25x FY2010E earnings, or Rs3,038 per share. We value the subsidiaries at Rs1,006 per share of L&T. At the current market price of Rs2,882, the stock is trading at 19.2x its FY2010E consolidated earnings. We recommend a Buy on the stock with our sum-of-the-parts based price target of Rs4,044.   Lupin      Cluster: Apple Green Recommendation: Buy Price target: Rs840 Current market price: Rs644 Strong business fundamentals at cheap valuations Result highlights Lupin's performance in Q4FY2008 and FY2008 was ahead of our expectations. The consolidated revenues grew by a healthy 41.1% to Rs750.4 crore in Q4FY2008 and by 34.4% to Rs2,706.4 crore in FY2008. The revenue growth was driven by a continued outperformance of the company's domestic formulation business, strong traction in the US business and the consolidation of the recent acquisitions. Excluding the impact of the acquisitions (which contributed Rs75-80 crore collectively during the quarter), the like-to-like growth stood at ~25-27% year on year (yoy). Despite a foreign exchange (forex) loss of Rs19 crore and provisional write-off of Rs14.0 crore towards a proposed change in the target plus rate for export incentives from 10% to 5%, the company's operating profit margin (OPM) expanded by 140 basis points to Rs16.0 crore in Q4FY2008 and by 160 basis points to 16.1% in FY2008. This caused the operating profit to grow by 54.3% to Rs119.7 crore in Q4FY2008 and by 49.1% to Rs435.9 crore in FY2008.  The reported net profit declined by 32.0% to Rs95.9 crore in Q4FY2008 (on account of a non-recurring income of Rs75.5 crore [post-tax] received from the sale of the Perindopril patent rights to Laboratories Servier of France in Q4FY2007). Excluding this income, the adjusted profit actually grew by 46.1% to Rs95.9 crore and was ahead of our estimate of Rs77 crore. In FY2008, Lupin's reported net profit grew by 32.3% to Rs408.3 crore. Adjusting for the Perindopril-related income, the growth stood at ~44% yoy in FY2008.  The management of Lupin has guided towards an aspirational revenue target of $1 billion in FY2009, of which $100 million would come from acquisitions of brands in the USA or of companies in newer markets. We have revised our FY2009 estimates for Lupin to reflect the better-than-expected performance in FY2008 and the guidance provided by the management. We are revising our FY2009 revenue estimate upwards by 3.8% to Rs3,395.4 crore and our FY2009 profit estimate by 2.9% to Rs400.7 crore. We are also introducing our FY2010 numbers in this report. We expect the company to register a revenue growth of 17.0% in FY2010 to Rs3,971.0 crore. The profits are expected to grow by 20.0% to Rs480.9 crore, resulting in earnings of Rs54.4 per share in FY2010. At the current market price of Rs644, Lupin is discounting its FY2009E earnings by 14.2x and its FY2010E earnings by 11.8x. The valuations are very attractive, possibly the lowest amongst the front-line pharmaceutical stocks. Keeping in mind the strong business fundamentals and the growth potential of the company, we reiterate our Buy recommendation on Lupin with a price target of Rs840.   Mahindra & Mahindra  Cluster: Apple Green Recommendation: Buy Price target: Rs800 Current market price: Rs606 Price target revised to Rs800 Result highlights The Q4FY2008 results of Mahindra and Mahindra (M&M) are slightly below our expectations due to higher tax expenses incurred during the quarter. The stand-alone net sales grew by 14.6% year on year (yoy) to Rs3,148 crore in Q4FY2008. The operating profit margin (OPM) for the quarter declined by 50 basis points to 10.9% yoy. A lower other income, and higher interest cost and income tax resulted in a 16% decline in the pre-exceptional profit after tax (PAT) to Rs207 crore. The company realised a net extraordinary income of Rs14 crore on account of the profit arising from the merger of certain subsidiaries with it and the expenses on a voluntary retirement scheme. Thanks to this, the reported PAT declined by only 13.4% to Rs221 crore from Rs255 crore in Q4FY2007. On a stand-alone basis, the net sales for FY2008 grew by 14.7% to Rs11,503 crore. The operating profit rose by 8.3% to Rs1,336 crore. The adjusted PAT grew by 10.4% to Rs 938.2 crore whereas the reported PAT grew by 14.9% to Rs1,103.4 crore. On a consolidated basis, the net sales for FY2008 grew by 35.2% to Rs23,775 crore. The OPM declined from 15.5% in FY2007 to 13.9% in FY2008. Consequently, the operating profit grew by only 21.6% to Rs3,308 crore. The PAT after minority interest grew by 6% to Rs1,573 crore.  The company has increased its capital expenditure (capex) outlay and plans to spend approximately Rs2,000 crore per year for the next three years. The funds would be utilised for setting up the new plant at Chakan, carrying out capacity expansions at the other plants, launching new products and carrying out research and development (R&D) activities.  We expect FY2009 to be a year of challenges for the company as during this period its sales are likely to be affected by the caution being exercised by financiers in extending credit on account of the rising delinquencies in the automotive and tractor businesses. In addition, the margins are expected to be under pressure on account of the rising commodity prices. The management hopes to cope with these challenges with its continued focus on cost control, process efficiencies and product innovations that exceed customer expectations. We continue to value M&M on the sum-of-the-parts (SOTP) method and at the current market price of Rs606, the stock discounts its standalone FY2010 earnings by 15.8x. We maintain our Buy recommendation on the stock with a revised price target of Rs800.     Mahindra Lifespace Developers       Cluster: Ugly Duckling Recommendation: Buy Price target: Rs850 Current market price: Rs647 Price target revised to Rs850 Key points Mahindra Lifespace (MLD) recently announced that it has won a joint bid with BE Billionaire & Co to develop a residential project spanning 2.74 million square feet (mn sq ft) at Multi-modal International Hub Airport (MIHAN), Nagpur. MLD is expected to hold a 70% stake in this project. The company expects a realisation of Rs2,500 per sq ft on account of the residential requirement from the employment generated at MIHAN development. MLD is also expanding its stand-alone property portfolio impressively. The company currently has ongoing projects of 2.2 mn sq ft and forthcoming projects of 4.8 mn sq ft. It also has better realisation than our expectation for the ongoing projects. To incorporate the improved realisation as well as the addition of the MIHAN projects in the stand-alone properties, we have revised MLD's net asset value (NAV) to Rs820 per share. We have also revised our earnings estimate for FY2009 by 5.9% and that for FY2010 by 0.7%. We continue to use the sum-of-the-parts valuation approach and value the stock at Rs850 per share. At the current market price, the stock is trading at 0.8x to its NAV, 22.1x FY2009 earnings estimate and 9.3x FY2010 earnings estimate. We maintain Buy on the stock with a revised price target of Rs850 per share.   Nucleus Software Exports    Cluster: Emerging Star Recommendation: Buy Price target: Rs355 Current market price: Rs255 Results in line with expectations Result highlights Nucleus Software reported a revenue growth of 6% quarter on quarter (qoq) and 29.8% year on year (yoy) to Rs78.1 crore in the fourth quarter ended March 2008. The sequential growth in the revenues was driven by a 1.2% sequential growth in the product business whereas the revenue from the projects and services business grew by 17.4%. The operating profit margin (OPM) increased by 162 basis points sequentially to 26.7% during the quarter. The OPM was enhanced mainly on account of a 180-basis point decline in selling, marketing, and overhead cost as percentage of sales, which was 14.1% in Q4FY2008 down from 15.8% in Q3FY2008.  The other income declined by 15.7% qoq to Rs1.1crore. Tax as percent of profit before tax (PBT) jumped to 14.6% compared to 6.9% in Q3FY2008. Consequently, the profit after tax (PAT) grew by just 3.2% sequentially to Rs16 crore. In terms of order highlights, during the quarter the company won orders for implementing 18 product modules. Pending orders decreased by Rs12 crore qoq to Rs318 crore. Another concerning factor is that some of the large orders are likely to get completed this year. However, the management is confident of adding new orders and also extend relationship with existing clients. It has strengthened the sales team and is witnessing an uptick in request for proposals.  On a yearly basis, the company’s revenue grew by 30.5% to Rs288.7 crore, while the PAT grew by 12% to Rs61.7 crore. We have kept 2009 earnings unchanged and have also introduced 2010 estimates. At the current price, the stock trades at 10.7x FY2009 estimated earnings and 8.9x FY2010 estimated earnings. We maintain our Buy recommendation on the stock with a price target of Rs355.   Selan Exploration Technology   Cluster: Ugly Duckling Recommendation: Hold Price target: Rs230 Current market price: Rs245  Price target revised to Rs230 Result highlights For Q4FY2008, Selan Exploration Technologies (Selan) has reported a growth of 38% in its gross revenues to Rs11.7 crore. However, after adjusting for Rs1.6-crore provision made for profit petroleum (for Lohar oilfield), the revenue growth stood at 19.1% to Rs10.1 crore. The growth in the net revenues was contributed by an 8.2% increase in volumes and a 10.1% improvement in average realisations.  The operating profit margin (OPM) stood at 56% in Q4FY2008, down from 61.6% in Q4FY2007 and 62% in Q3FY2008. The OPM was dented by provision for profit petroleum. Adjusting for the same, the OPM stood at 71.4%, which is highest ever for any quarter. Consequently, the earnings declined by 20.1% to Rs2.7 crore during the quarter. Apart from profit petroleum, a jump in effective tax rate also adversely impacted the earnings. For the full year, net revenues and earnings grew by 31.8% and 23.9% respectively. The OPM was flat at 61.6% as against 61.5% in FY2007.  In terms of operational highlights, the company has successfully drilled two new wells and aims to invest around Rs50-60 crore in exploration activity over the next two years. To fund the same, the promoters have been issued convertible warrants on preferential basis. The conversion price of Rs165 per warrant implies inflow of around Rs29.7 crore and would result in equity dilution of 12.5% to 1.62 crore equity shares. To factor in the profit petroleum, fine tune the volumes estimates and increase in assumption for realisation, we have revised downward FY2009 earning estimates. We are also introducing FY2010 earning estimates. The net revenues and earnings are estimated to growth at compounded annual growth rate (CAGR) of 30.9% and 34% respectively. We believe given the aggressive exploration plans and firm crude prices, there is scope for positive surprises on the results front. Moreover, the possible induction of strategic investors could be a strong trigger going ahead. Hence, we maintain our Hold recommendation on the stock despite the fact that the scrip trades at a premium to our DCF-based fair value of Rs230.    Shiv-Vani Oil & Gas Exploration Services  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs725 Current market price: Rs630 Price target revised to Rs725 Result highlights Shiv-Vani Oil & Gas Exploration (Shiv-Vani) has reported an excellent top line growth of 63.3% in its consolidated revenues to Rs178.5 crore for Q5FY2008. The growth was achieved on the back of strong realisation and higher revenue contribution of the coal bed methane project.  The operating profit margin (OPM) improved by 330 basis points year on year (yoy) to 39.1% primarily due to the improvement in the realisation and more efficient fleet utilisation. Consequently, the operating profit grew by an astounding 147% to Rs69.9 crore. However, on a sequential basis, the margin dipped by 230 basis points to 39.1% because of higher other expenses, which included some one-time items of foreign exchange (forex) losses. Both interest and depreciation charges have risen on the back of increased capital expenditure (capex) incurred by the company. However, the lower taxes led to a brilliant 165% growth in the net profits to Rs31.8 crore.  The company plans to spend close to Rs650 crore in FY2009 as it looks to add six more rigs by July 2008, taking the total number of rigs to 32. Further, the number would be increased to 40 rigs by the end of the year.  The company's order book remains healthy at Rs3,500 crore. We have fine-tuned our numbers a little in line with the company' s capex plan. We marginally upgrade our FY2009 profit estimate by 1.3% to Rs161 crore and upgrade our FY2010 profit estimate by 15% to Rs241.2 crore, as majority of the new rigs would start to contribute to the top line. At the current market price the stock trades at 19.5x FY2009 and 13x FY2010 estimated earnings. We maintain our Buy call on the stock with a revised price target of Rs725.   Shree Cement   Cluster: Cannonball Recommendation: Buy Price target: Rs1,225 Current market price: Rs916 Price target revised to Rs1,225 Result highlights Shree Cement's Q4FY2008 revenues grew by 71.9% year on year (yoy) to Rs650.1 crore on the back of a 61.1 % year-on-year growth in the volumes to 2.1 million tonne and a 6.7% year-on-year growth in the realisations to Rs3,167 per tonne. The capacity additions carried out by the company at regular intervals during FY2008 drove its volumes.  For Q4FY2008 the operating profit margin (OPM) declined by 50 basis points yoy to 39%. The drop was mainly on account of a 29.2% increase in the raw material cost per tonne of cement and also a 49.3% increase in the freight cost per tonne. Consequently, the company's operating profit grew by 69.7% to Rs253.7 crore. The interest expense increased sharply to Rs24.6 crore as compared with Rs1.6 crore in Q4FY2007. The sharp increase in the interest expense was primarily because the company has stopped capitalising the interest expense on the capacity that came on stream during the quarter. The depreciation charge also increased by 20.7% to Rs186.7 crore due to capacity additions carried out by the company. The reported net profit increased by 71.9% to Rs 41.1 crore. In Q4FY2007 the company had written back some pre-operative expenses. Therefore, the adjusted net profit for Q4FY2008 increased sharply from Rs2.4 crore in Q4FY2007 to Rs41.1 crore. For the year ended March 2008, the net sales increased by 51% yoy to Rs2,065.9 crore and the adjusted net profit stood at Rs287.9 crore, up 81.3% yoy.  Going ahead, we expect Shree Cement's earnings growth to come under pressure due to a decline in the cement prices. Hence, we expect the company to post earnings per share (EPS) of Rs85 and Rs91.5 in FY2009 and FY2010 respectively. The stock's valuation is attractive at enterprise value (EV) per tonne of $65 on FY2010 expanded capacity. At the current market price of Rs916, the stock trades at 10.8x and 10x its FY2009 and FY2010 earnings respectively as well as an EV/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.2x and 2.8x for FY2009 and FY2010 respectively. We maintain our Buy recommendation with a revised price target of Rs1,225 (at EV per tonne of $90).   State Bank of India  Cluster: Apple Green Recommendation: Buy Price target: Rs2,315 Current market price: Rs1,779 Price target revised to Rs2,315 Result highlights The Q4FY2008 profit after tax (PAT) of State Bank of India (SBI) came in at Rs1,883.2 crore, indicating a growth of 26.1% year on year (yoy).  The reported net interest income (NII) for the quarter stood at Rs4,800.6 crore, up 5.6%. However, after adjusting for the one-time items in Q4FY2008 and the year-ago period, the NII comes in at Rs4,415.6 crore, up only 1% yoy. The non-interest income growth was muted at 5.6% yoy, due to a higher dividend income base last year, losses in the foreign exchange segment and flattish treasury income growth. Notably, the operating expenses were flat at Rs3,245.4 crore, primarily due to net effects of a Rs475-crore write-back of gratuity and pension related provisions as well as a one-time provision of Rs200 crore related to wage hike. The provisions and contingencies for Q4FY2008 were up 14.6% yoy. Amongst the provisions, those for the non-performing assets (NPAs) witnessed a spike of 46% yoy and reached Rs1,067 crore. However, the increase was offset by lower investment depreciation and provisions for standard assets compared with the year-ago period. Notably, the bank has not made any specific provisions for mark-to-market (MTM) losses arising from the credit-linked notes portfolio, which is estimated at ~ $800 million. SBI's asset quality deteriorated further on absolute and relative terms, thereby causing concern. The gross NPAs (GNPA) increased by 28.4% yoy to Rs12,837 crore, while the net NPAs (NNPA) jumped up by 41.2% yoy to Rs7,424 crore.  The management stated that the bank is witnessing change in the behavior of the performing accounts following the announcement of the debt-waiver scheme. Consequently, the agri-NPAs have increased by ~ Rs1,000 crore. Various subsidiaries of the bank continued to perform well in their respective businesses. The management is confident about approval for the State Bank of Saurashtra merger proposal.  At the current market price of Rs1,779, SBI trades at 16.3x 2009E earnings per share, 7.4x 2009E pre-provisioning profit per share and 2.1x 2009E book value per share. We maintain our Buy call with a revised price target of Rs2,315.   Subros  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs63 Current market price: Rs40 Price target revised to Rs63 Result highlights The Q4FY2008 results of Subros are marginally ahead of our expectations.  The top line for the quarter grew by 2.4% year on year (yoy) to Rs187.8 crore led by a growth of 7.6% in the volume. The realisation declined by 4.8% during the quarter. The realisation dropped because Subros supplied only components for newer models of passenger cars during the quarter instead of full kits comprising compressors and components. The operating profit margin (OPM) improved by 110 basis points leading to an operating profit growth of 12.3% to Rs24.4 crore. Higher interest and depreciation charge led the profit after tax (PAT) to grow by 9.8% to Rs8.87 crore. For FY2008, sales saw a growth of 2.4% to Rs662.7 crore and PAT stood at Rs29 crore, giving earnings per share (EPS) of Rs4.8. The company has bagged order from Maruti Suzuki to supply compressors for the latter's new export vehicle A Star. This is expected to boost Subros' sales volumes for FY2009 and FY2010. We are downgrading our EPS estimate for FY2009 to Rs6.2 due to some delay in the company's exports and the substantial decline in the realisation. We are also introducing in this note our EPS estimate for FY2010—Rs9.0. At the current market price of Rs40 the stock is trading at compelling valuations of 4.3x FY2010E EPS and 1.9x FY2010E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). The stock's valuations are at a huge discount to that commanded by its peers. We maintain our Buy recommendation on the stock with a revised price target of Rs63.   Surya Pharmaceuticals  Cluster: Ugly Duckling Recommendation: Buy Price target: Rs205 Current market price: Rs107  Results beat expectations Result highlights Surya Pharmaceuticals (Surya) reported an impressive 89.5% increase in revenues to Rs156.5 crore in Q4FY2008. The revenue growth in FY2008 was equally robust with a jump of 63.2% to Rs496.7 crore. The revenue performance was above our expectations and in line with the management guidance of Rs500 crore of revenues during FY2008. An escalation in the raw material cost caused Surya's operating profit margin (OPM) to shrink by 420 basis points to 14.8% during Q4FY2008 and by 40 basis points to 17.0% in FY2008. Consequently, the operating profit grew by 46.8% to Rs23.1 crore in Q4FY2008 and by 59.0% to Rs84.4 crore in FY2008. Despite higher interest and depreciation charges, Surya's net profit grew by an impressive 56.6% to Rs12.8 crore in Q4FY2008 and by 95.4% to Rs46.7 crore in FY2008. The profits reported by the company exceeded our expectations for both Q4FY2008 and FY2008.  In addition to its investment in the sterile facility in Jammu, Surya has announced a capital expenditure (capex) of Rs100 crore for further de-bottlenecking of the existing capacities and expansion of menthol capacities. This would lead to a substantial jump in the company's interest and depreciation costs in FY2009, thereby straining its profitability. In order to factor in the higher interest and depreciation costs on account of a substantially higher planned capital expenditure in FY2009, we are downgrading our FY2009 net profit and earnings estimates by 7.3% each to Rs53.5 crore and Rs29.7 per share respectively. We have maintained our revenue estimate for FY2009 at Rs650 crore. For FY2010, we expect the company to register a top line of Rs800 crore. We expect the net profit to grow by 34% in FY2010 to Rs71.7 crore, yielding earnings of Rs32.1 per share. At the current market price of Rs107, Surya is trading at 3.6x its FY2009E diluted earnings of Rs29.7 and 2.7x its FY2010E diluted earnings of Rs39.9. At the current prices, Surya offers a remarkable combination of strong growth at cheap valuations. However, the near-term performance of the stock might be muted due to the earnings de-growth expected in FY2009 on account of the high capex and debt requirements. We maintain our Buy call on the stock with a price target of Rs205.   Tata Chemicals       Cluster: Ugly Duckling Recommendation: Buy Price target: Rs535 Current market price: Rs400 Hardening soda ash prices augur well Tata Chemicals' newly acquired US subsidiary, General Chemical Industrial Products Inc. (GCIP), has increased contract prices by US$50 per short tonne and spot prices by US$75 per short tonne for all bulk and packaged soda ash shipments with immediate effect. The revised spot price (FOB Green River, Wyoming) ranges between US$260 and US$290 per net tonne excluding energy surcharge of US$7.5 per net tonne. GCIP is the second largest soda ash producer in the USA. Following this, FMC Wyoming Corporation, which is the largest US soda ash producer, has also announced a US$50 hike in the list and off-list prices for all grades of soda ash effective July 1, 2008, or as contract terms permit.   Television Eighteen India   Cluster: Emerging Star Recommendation: Buy Price target: Rs486 Current market price: Rs355 Price target revised to Rs486 Result highlights TV18 has posted robust performance across businesses for Q4FY2008. The operating revenues for the quarter grew by a healthy 64.7% year on year (yoy) to Rs132.4 crore. All the segments—news, Internet, and newswire--continued their strong growth trend. The news business revenues grew by 52.9% yoy to Rs109.9 crore, as the TV channels CNBC TV18 and Awaaz continue to maintain their stronghold over Indian business news viewers. The operating profit margin (OPM) for the segment was up 56 basis points quarter on quarter (qoq) to 44.8%. Web18 continues in investment mode. Inspite of a stupendous 112.2% year-on-year (y-o-y) growth in the revenues to Rs18 crore, the operating loss for the segment stood at Rs13.2 crore, as the company continued with the policy of writing off all the costs incurred, including the capital expenditure incurred on the development of new portals. Thus, Web18 is spending heavily towards its growth, the results of which we believe would be seen over the longer term. Newswire18 posted a 25.6% quarter-on-quarter (q-o-q) growth in its revenues to Rs4.5 crore. The operating loss stood at Rs2.0 crore. The business is witnessing rapid subscriber addition and we expect the business to break even in FY2009.  The consolidated OPM of the company during the quarter stood at 25.7% against 39.4% in the corresponding quarter last year (and 28% in Q3FY2008). The overall OPM continues to be impacted by the heavy spend on augmenting Internet and newswire businesses. Thereby, the operating profit growth was restricted to 7.4% yoy to Rs34 crore. Higher depreciation, interest and substantially higher tax rate led the adjusted profit after tax (PAT) pre-ESOP charge during the quarter to be at Rs15.2 crore against Rs23.1 crore in Q4FY2007. Though the fundamental attributes of TV18’s business model remain on a strong footing, on the back of potential increase in competition, dependence on stock market participants and unlocking of value in Web18 appearing distant we are reducing our sum-of-the-parts price target to Rs486 and maintain a Buy recommendation on the stock.   Thermax        Cluster: Emerging Star Recommendation: Buy Price target: Rs602 Current market price: Rs454 Price target revised to Rs602 Result highlights For Q4FY2008, Thermax reported a growth of 18.8% in its consolidated revenues to Rs1,017.3 crore. The sales growth was in line with our expectation. The energy division revenues were up by 20.5% year on year (yoy) to Rs815.8 crore. The environment division reported a 5.2% increase in the revenues on a high base to Rs221.3 crore. Led by operating leverage and reduced raw material cost as a percentage of sales, the operating profit grew by 28.7% to Rs136.4 crore. The operating profit margin (OPM) reported an improvement of 100 basis points on a year-on-year (y-o-y) basis to 13.4%. Net profit before extraordinary items reported an increase of 20.9% to Rs80.9 crore. The net profit growth was lower than our expectation. The order book of the company stood at Rs2,637 crore of which Rs2,133 crore worth of orders are for the energy division. The management has cited in the conference call that it has seen a slow down in order inflow, however FY2009 to date order inflow has been encouraging. Given the lower than expected order inflow, the company expects the growth rate to moderate in FY2009.  The company has also signed a technology transfer agreement with Babcock & Wilcox for manufacturing utility boilers based on sub-critical technology with rating ranging from 100MW to 800MW. The company is in talks with perspective clients and expects major orders to accrue from private sector players.  Against the backdrop of a slow down in the order inflow, we have revised our estimates for Thermax and expect it to deliver compounded annual growth rate (CAGR) of 22.3% and 24.2% in its revenues and profits respectively over FY2008-10E. We are also revising our price target to Rs602 based on 16x FY2010 earnings per share (EPS) and maintain our Buy call on the stock.    Union Bank of India Cluster: Ugly Duckling Recommendation: Buy Price target: Rs230 Current market price: Rs174 Results above expectations Result highlights Union Bank of India’s reported bottom line was well above our expectations. The bank reported a bottom line of Rs521.1 crore for Q4FY2008, indicating a growth of 128% year on year (yoy). The net interest income (NII) for the quarter came in at Rs833.9 crore, which was largely flat compared with that of Rs842.4 crore reported a year ago. The flattish top line performance stemmed from a 41.2% increase in the interest expenses, which outpaced the 24.2% growth in the interest income implying pressure on margins.  The non-interest income registered a 28.5% year-on-year (y-o-y) growth and reached Rs310.7 crore, thereby helping the bottom line. The growth was driven by a spike in the treasury gains. During Q4FY2008, the operating expenses were contained at Rs253.9 crore, down 22.1% yoy. The decline in the operating expenses was primarily due to a 61.6% y-o-y drop in the staff expenses as the bank reversed provision of Rs128 crore related to pension and AS-15. The provisions during the quarter were up by 15.8% yoy and stood at Rs365.2 crore. Importantly, the quarter saw a significant drop in tax provisions. For Q4FY2008, the tax provisions came in at Rs4.4 crore compared with Rs214.4 crore reported for the year-ago period. Asset quality remained healthy with % gross non-performing assets (GNPAs) at 2.18% and % net non-performing assets (NNPAs) at 0.17%. Capital adequacy ratio (CAR) as at end of Q4FY2008 stood at a comfortable 15.51%, compared with 12.8% a year ago. During the quarter, advances grew by 19.2% yoy while deposits registered a strong growth of 22% yoy. At the current market price of Rs174, Union Bank of India trades at 6.6x 2009E earnings per share (EPS), 3.5x 2009E pre-provisioning profit (PPP) per share and 1.6x 2009E book value (BV) per share. We maintain our target price and buy recommendation on the stock.   Wockhardt    Cluster: Ugly Duckling Recommendation: Buy Price target: Rs505 Current market price: Rs303 Price target revised to Rs505 Result highlights Wockhardt's Q1CY2008 performance has fallen short of expectations, with the consolidated net sales growing by 50.3% to Rs785.7 crore and the reported net profit declining by 23.2% to Rs50.9 crore. The top line was in line with estimates, due to strong traction in the domestic formulation business, the UK business and the consolidation of the Morton Grove and Negma acquisitions whereas the profits were dragged down by the high interest burden (due to the acquisitions) and the unexpected marked-to-market (MTM) loss of Rs27.9 crore on hedging instruments.  The company has reassured that it will not incur any additional foreign exchange (forex) losses on hedging in the future as it has taken appropriate measures to safeguard against these. Excluding this extraordinary loss, the adjusted net profit of the company increased by 18.9% to Rs78.8 crore, which was lower than our estimate of Rs98 crore. Wockhardt's operating profit margin (OPM) stood flat at 22.1% in Q1CY2008. The margin performance is encouraging in light of the acquisition of the low-margin businesses and is clearly indicative of Wockhardt's ability to increase the profitability of the acquired companies. We expect the margin to improve sequentially in the coming quarters as the integration benefits start flowing in. The company reported operating profit of Rs173.7 crore, a growth of 50.0% year on year (yoy).  To factor in a higher than expected interest burden on account of higher than expected debt levels and the unexpected MTM loss of Rs27.9 crore incurred on hedging of interest costs, we are revising our earnings estimate for Wockhardt but keeping our revenue numbers intact. We are downgrading our CY2008E earnings by 15.0% to Rs33.3 per share and our CY2009E earnings by 7.8% to Rs42.2 per share. At the current market price of Rs303, the stock is available at 9.1x its CY2007E and 7.2x its CY2008E earnings, on a fully diluted basis. We maintain our Buy recommendation on the stock with a revised price target of Rs505.   WS Industries India Cluster: Vulture’s Pick Recommendation: Buy Price target: Rs108 Current market price: Rs82 High input cost hurts bottom line Result highlights For Q4FY2008 WS Industries (WSI) has reported a 47.9% growth in its revenues to Rs66.3 crore. The revenue growth was led by a robust growth in both project and insulator sales.  The operating performance of the company was disappointing with the operating profit margin (OPM) declining by 20 basis points year on year (yoy) on account of a rising input cost. The raw material cost as a percentage of sales increased by 840 basis points to 52.2%. The interest cost declined by 13.5% to Rs1.5 crore whereas the depreciation charge rose by 16.9% to Rs1.0 crore during the quarter.  The net profit increased by 36.8% to Rs3.1 crore and was below our expectations on account of the lower than expected operating performance and a higher than expected tax rate. The tax rate in the current quarter came in at 44.9% on account of a high deferred tax provisioning.  At the end of FY2008, the unexecuted orders of the company stood at Rs180 crore against Rs150 crore in Q3FY2008. The promoters have subscribed to 925,000 warrants of the company at Rs107 per warrant; the same on conversion would result in a 4.2% dilution of the equity. WSI is in the process of drawing up a concrete plan for the utilisation of the funds raised through this issue.  The company’s additional capacity in the Andhra special economic zone (SEZ) is expected to come on stream by mid FY2009. In our view this capacity would be the growth driver for the company going forward. A healthy order book of Rs180 crore and increased production capacity provide visibility to the future earnings of the company.  We have revised our FY2009 earnings estimate to Rs7.5 per share owing to the higher input cost. We have also introduced our FY2010 earnings estimate in this report--we expect WSI to report compounded annual growth rate (CAGR) of 17.8% and 26.5% in the revenues and profits respectively over FY2008-10. We maintain our positive outlook on the stock and maintain our Buy recommendation on it with a price target of Rs108. We have valued WSI on the basis of the sum-of-the-parts (SOTP) method. We have rolled forward the target multiple for the core business and valued the same at Rs80.2 per share. We have valued the real estate subsidiary at Rs27.9 per share. At the current market price the stock trades at 7.3x and 5.5x our fully diluted earnings per share (FDEPS) estimates for FY2009 and FY2010 respectively. MUTUAL GAINS Sharekhan's top equity fund picks We have identified the best equity-oriented schemes available in the market today based on the following 3 parameters: the past performance as indicated by the one and two year returns, the Sharpe ratio and Fama (net selectivity).  The past performance is measured by the one and two year returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation.  FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager.  SECTOR UPDATE Banking        Liquidity crunch ahead? State Bank of India (SBI), in an unexpected move, has raised deposit rates by 25-50 basis points (effective from June 1) on medium to long-term maturities. The hike in the deposit rates has come as a surprise, considering the ongoing slack season and the hikes announced in the cash reserve ratio (CRR) recently. Moreover, the bank had lowered its prime lending rate by 50 basis points (in two tranches of 25 basis points each) in February 2008.  Cement Government partially eases export ban The government has partially relaxed the ban on cement exports that was imposed on April 11, 2008. According to a notification by the Directorate General of Foreign Trade, the government has allowed 2 million metric tonne of cement to be exported from Gujarat. This is a positive development for cement manufacturers in Gujarat as the region was already experiencing a slowdown in demand. The demand slowdown would have worsened during the monsoons, forcing the manufacturers to either cut down on production or sell cement at lower prices.  Information Technology Cognizant caps front tech stock valuation in near term Front tech Indian IT stocks witnessed resurgence in the last couple of months on the back of the extension of STPI benefits, the stabilisation of rupee against the dollar and the guidance announcements in line with street expectations. The front tech IT stocks have grown in the range of 13%-25% from April 1, 2008.   Power       Power to empower We recently attended the conference on "Key Inputs for Power Sector for 11th Plan & Beyond" organised by the Confederation of Indian Industry (CII). We present the key takeaways from the meeting. VIEWPOINT  Astral Poly Technik   Driven by volume growth Astral Poly Technik (Astral) is a manufacturer and provider of Chlorinated Polyvinyl chloride (CPVC) and Polyvinyl chloride (PVC) piping and plumbing systems in India since 1999. The company has production facilities at Gujarat and Himachal Pradesh to manufacture plumbing systems with diameter ranging from ½" to 8". The products include CPVC pipes and fittings for hot and cold water plumbing systems, industrial piping system for transportation of hazardous and highly corrosive chemicals, and lead free PVC system for cold water application.   Bharat Forge       Subsidiaries drag FY2008 performance  Result highlights The stand-alone Q4FY2008 results of Bharat Forge Ltd (BFL) are in line with the consensus estimate. The consolidated results are below expectations due to the poor performance of the subsidiaries. On a stand-alone basis, the sales grew by 12.3% to Rs580 crore during the quarter. The domestic sales grew by 4.4% and the exports grew by 22.8%. Despite a rise in the prices of its raw materials the company’s raw material cost did not rise in this quarter because it had contracted the raw materials at a lower cost. As a result, the operating profit margin (OPM) for Q4FY2008 increased by 70 basis points to 24.8%, leading to a growth of 15.6% in the operating profit to Rs144 crore. The stand-alone profit after tax (PAT) for Q4FY2008 grew by 6.3% to Rs68.3 crore. For FY2008 the stand-alone sales grew by 17.8% to Rs2,196.5 crore, the operating profit grew by 11.7% and the adjusted PAT declined by 11.4% to Rs217.2 crore.  The consolidated FY2008 sales grew by 11.3% to Rs4,652.3 crore. The reported PAT grew by 3.7% year on year (yoy) to Rs301.5 crore against Rs290.6 crore in FY2007. The consolidated performance remains adversely affected by a lower than expected improvement in the company's Chinese operations as well as a slowdown in its US operations. BFL's plan to expand into the non-auto segment is on track and it is setting up two plants, one each in Baramati and Pune, which are expected to commence operations from Q4FY2009 and Q1FY2010 respectively. BFL has entered into a joint venture with National Thermal Power Corporation (NTPC) to manufacture power equipment. The recovery in the domestic commercial vehicle (CV) market has got delayed due to the rising prices of steel and strong interest rates. The US CV market is expected to be volatile in the current year. The de-risking strategy by diversification in the non-automotive space will bear fruits only from FY2010 onwards. At the current market price of Rs294, the stock quotes at a price/earnings ratio of 21.7x its FY2008 consolidated earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 10.0x. EARNINGS GUIDE Please click to read report: Sharekhan ValueLine Regards, The Sharekhan Research Team myaccount@sharekhan.com

 

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